COST & MANAGEMENT

ACCOUNTING
Riya Gupta – 21PGDM012
 Introduction to Budgetary Control
The Institute Of Cost And Management Accountants Of England And
Wales Defines Budgetary Control “As The Establishment Of Budgets
Relating The Responsibilities Of Executives To The Requirements Of A
Policy, & The Continuous Comparison Of Actual With Budgeted
Results Either To Secure By Individual Action The Objective Of That
Policy Or To Provide A Base For Its Revision.” Broadly Speaking, It Is a
System of Achieving the Firm’s Objectives with Minimum Possible
Cost.
The Essential Features of Budgetary Control as Per Above Definition
Are As Follows:
 Budgetary Control Requires Setting Up Of The Different Kinds Of
Budgets Which Are Related To The Responsibilities Of The
Executives For The Implementation Of The Policy.
 The Actual Performances Are Compared With The Budgeted
Limits Or Targets, For The Purpose Of Cost Control And Cost
Reduction.
 Where The Comparison Reveals An Unfavourable Results,
Corrective Measures Are Taken To Improve Upon.
Objectives of Budgetary control: -
 Portraying With The Precision The Overall Aims Of The Business
And Determine The Targets Of Performance For Each Section Or
Department Of The Business.
 To Optimally Utilize the Physical and Financial Resources of the
Business.
 To Fix The Responsibilities Of The Departmental Heads And
Employees.
 To Increase Business Efficiency.
 To Co-Operate In Managerial Tasks.
 To Use As A Source Of Business Communication.
 To Establish Co-Ordination between Various Departments

Classification of
Budgets
As to their Functional
As to their Nature As to their Content
Aspects

Fixed Cash Budget

In Physical Terms
Budgets
In Monetary
Sales Budget
Terms
Flexible
Budgets
Purchase Budget
Selling & Distribution Overheads
Budget Research & Development
Budget
Production Budget

Plant Utilization Budget Production Cost Budget

Administrative Overheads Capital Expenditure Budget

Budgets
 Case Scenario
History of the Company
 Great Bus Tours Co. Ltd. (GBTCL) is an open top double-decker bus
sightseeing company, particularly identified with its special red and
cream-colored buses. It commenced operating in small town of
Meghalaya in June 2013 with four buses and as of 2017 operated over
44 buses in north east region of India. GBTCL operates five routes with
stops at tourist destinations. The company runs hop-on, hop-off bus
tours of various hills, with one 24-hour ticket valid for unlimited
journeys on the route.

Budget Process/Incentive Plan

 As a part of management performance control and incentive scheme it
has been following participative budgeting approach. In GBTCL,
budgeting is a joint process in which functional divisions develop their
plans in conformity with corporate goals for the next financial year.
Based on these plans, divisions prepare functional budgets and send to
the appropriate management for review and approval.
 The budgets after the incorporation of the feedback and suggestions
received from the said management, are finalized for the
implementation. Then, finalized budgets are used as yardstick for
performance measurement. Comparing the actual performance with
the yardstick, bonus and other performance related incentives are
considered. The higher management believe that this performance
control and incentive scheme is very helpful to measure the
performance and fixing responsibilities for the responsibility centers.
 Budgeted Income Statement (’000)
Revenue 1,13,800
Less:
Variable Costs-
Direct material (Fuel, Lubricant and Sundries) 13,600
Direct Labor 40,500
Variable Overheads 7,700
Fixed Costs-
Operating Overheads (Buses, Garage, Salaries) 18,100
Marketing & Administration 10,700
Profit / Loss Before Taxes 23,200

Current Year’s Income Statement (’000)

Revenue 93,500
Less:
Variable Costs-
Direct material (Fuel, Lubricant and Sundries) 19,600
Direct Labor 37,700
Variable Overheads 6,200
Fixed Costs-
Operating Overheads (Buses, Garage, Salaries) 20,150
Marketing & Administration 10,100
Profit / Loss Before Taxes (250)

.
Other Information

Surprisingly above given current year’s actual results were not up to the mark.
Actual results were clearly showing adverse performance in comparison with
budgeted figures.
Managers of GBTCL were upset because they did not receive the bonus. Ms
Maggie, Tour Manager of Route No. 3, said –
“We lost 2 months revenue and fuel prices are almost doubled. We did our best
but these circumstances were beyond our control and we should not penalize at
all.”
In support of her statement, Ms. Maggie provided following additional
information–
• Rain is common in Northern Region. But, the past year set a record in
numbers. In July the expected average was 1,577 mm and received was 1,810
mm, In August the expected average rain was 990 mm and actual received was
1,535 mm. Heavy rain in these two months disrupted normal life of the region.
• The fuel prices has risen almost continuously since last year due to surge in
global crude prices.
• Additional operational expenses 22, 00,000 also incurred to remove the milky
appearance and give the stainless a nice new look effected by heavy rain.
She claimed that – “Revised budget with consideration of the above factors
would give different results and lead to different conclusions”
Required
ANALYSE the tour manager’s view.
Problem Identification
There is a company Bus Tours Co. Ltd. Which is famous for its red and cream-
colored buses. In 2014 the company started its service with four buses only in
Meghalaya. Currently, till 2018 data, the company has 44 buses in the
northeast region, and all the buses are operational to date. The company
GBTCL has over five active routes, and all five ways are related to a tourist
destination. The operates on the hop-on, hop-off service model for its various
hill regions. Under this model, the company provides a complete unlimited
journey 24 hours from its buses from one ticket per person. If the person
wants, he can get off from the bus and stay at that place for some time and
then again take another bus on the same ticket and continue his journey for
next whatever time is left. Generally, this ticket is only provided to the tourist
that they can move around and enjoy different places on the same single ticket
if they want.

This has a bottom-up approach. The participative approach of the budgeting,

with the help of this approach, the functional level management, creates the
plan. After creation, they send the project to the senior-level manager for their
suggestion, allocation, and Incorporation by the administration. After the
recommendation and review by the senior manager, then the functional team
will implement the same. Later, the finalized budget is used as a yard stick for
the company to operate daily. “Yardstick is the budget bench-mark which is set
by the company for its workers to work upon.” Later, the actual performance is
compared with the yardstick finalized budget of the company, after this bonus
and other versions are measured. According to higher management and they
believe, this type of budgeting is beneficial for the responsibility center
manager to fix the responsibility.

The company shows a profit of Rs 23, 20,000 Profit in the budgeted income
statement, but in the current year’s income statement, the company is having a
loss of Rs 2 50,000. Due to this, the management was not happy with the
performance, and also, they were upset because due to this reason, they did
not receive the bonus.
Ms. Maggie said that the company lost the two-month revenue and the fuel
price was also doubled, and a few more circumstances were beyond their
control, and hence they should not be penalized for this circumstance. To
support her statement, Mr. Maggie provided some information, and the point
was the weather condition of how in July expected rain was of 1577 mm but
exceeding its threshold the rain which came down was 1810. Same, in August,
the expected downfall was 990 mm, but the actual failure was 1535. The heavy
rainfall during this time misbalanced the complete everyday life of the region
and its working. The fuel price has risen since the last year due to the rise in the
global price of crude oil worldwide. Finally, the additional operational expense
of Rs 22 00,000 was incurred to remove the milky appearance and give the
stainless a new look, which was affected due to the heavy rainfall. By
considering the above factor, there must be prepared a new Budget plan and
which that further consideration, some new result would come out, and which
will take the scenario to complete a new conclusion.
 Solution
Revised Budgeted Income Statement (’000)

Revised Revenue [1,13,800 × 10/12 months] 94,833

Less:
Variable Costs-
Direct material [19,600 × 94,833 / 93,500] 19,879
{Based on actual expenses due to increase in
fuel price}
Direct Labor [40,500 × 94,833 / 1,13,800] 33,750
Variable Overheads [7,700 × 94,833 / 1,13,800] 6,417
Fixed Costs-
Operating Overheads [18,100 ÷ 2,200 ] 20,300
Marketing & Administration {same as original} 10,700
Profit / Loss Before Taxes 3,787
Analysis & Interpretation of Case Study
The climate has seriously hit GBTCL – a high downpour in July and August has
prompted a business drop. Income has seen a fall of 18% over the planned
figure. Direct Material (the more significant part of the fuel) is 21% of the Sales
(contrasted with 12% of a scheduled level) on account of climb in fuel cost.
Variable Overheads are practically the same. There is a saving of 1 50,000 in
Operating Overheads compared to the planned figure after cooking extra.

Operational Expenses of 22 00,000 (for the evacuation of smooth appearance

and so on) Moreover, there is a decrease in Marketing and Administration Cost.
The proportion of Salary to Sales rose to 40% in2017 from 36% (as planned).
This seems, by all accounts, to be atypical. All things were considered, there
ought to be a sliced in this proportion because of droop in business.

Grant of reward in the event of misfortunes isn't supported, and directors

ought to be considered responsible for their activities. Nonetheless, they ought
not to be deemed accountable for the occasions outside their ability to control.
A director can't handle developments in fuel cost, yet he/she should have the
fuel. Directors shouldn't be punished for wild occasions.

In like manner, in GBTCL, there should be a correction in the spending plan to

account for wild occasions.
The Revised Profit Margin has boiled down to 4% against the Target Profit
Margin of 20%. This plainly shows that the exhibition was benchmarked against
the higher objective. If a unique spending figure is utilized to quantify the
production, it will rebuff workers for the explanation outside their ability to
control.

GBTCL isn't excessively far away from Revised Profit Margin. Subsequently,
some reward might probably be viewed as granted to the workers who may
make more representative unwaveringness and possibly advantageous for the
long haul.
Further, consistent observing of Budget Performance
(accomplishment/disappointment) in GBTCL is necessary to defeat the present
circumstance. This assists with recognizing where corrections are needed in the
financial plan to account for evolving conditions, blunders, alteration to the
organization's arrangement, etc. Observing Budget Performance ought to be
the obligation of the directors in GBTCL.

The quintessence of the successful checking of Budget Performance is that the

chiefs ought to give exact, pertinent, significant data on an ideal opportunity to
the proper administration level so that the financial plan can provide a
reasonable objective for quantifying the presentation.

It is imperative to note that at the hour of re-examining the spending plan, the
essential financial plan, just as past data ought not to be overlooked as they are
the reason for setting up all spending plans.